Fresnillo H1 profit falls

London-listed Mexican miner Fresnillo , the world's largest primary silver producer, posted a 14 percent decline in first-half profit due to lower silver prices but remained positive for the full year.

Fresnillo, a unit of Mexico's Penoles , said on Monday that first-half attributable net profit fell to $121 million (74 million pounds) from $141 million, but was upbeat about the remainder of the year.

"We remain positive about the second half of 2009, reiterate our production targets for the full year and remain confident of achieving our budget for the year, whilst maintaining our current profit margins" said Chief Executive Jaime Lomelin.

The miner said it remained positive about the outlook for silver due to the metal's dual role for use in industrial applications and as an investment vehicle and inflation hedge.

Silver prices hit a two-month high of $15.16 an ounce on Friday, amid hopes economic recovery would boost industrial demand for the metal, before retreating.

Sales, excluding hedging and treatment charges, fell 14 percent to $426 million, but exceeded the consensus of $363.7 million. The prices received for its silver dropped 22 percent.

Lomelin said he expects silver prices in the second half to remain around current levels and he remained cautious, pending clearer signs of an economic recovery.

Investec analyst Jonathan Guy said: "We expect renewed cost inflation, driven by higher oil prices, in H2 to begin to erode margins, despite our expectation of higher silver prices." 

Fresnillo said the trend in cost inflation had reversed from the second half of 2008 as prices of some inputs, such as steel and explosives, had started to decline.

"We expect to see input prices continuing to decline in the second half" Lomelin said on a conference call, although he noted the exchange rate is unlikely to continue to help margins.

It reported lower costs per tonne at all three of its operating mines, helped by a 30 percent devaluation of the Mexican peso against the U.S. dollar.

Shares in the FTSE 100 miner were down 1.6 percent at 560 pence at 10:46 a.m. but outperformed the UK mining index .FTNMX1770, which was 4.4 percent lower, because Fresnillo's results were better than expected.

PRODUCTION RISE The group expects silver production to rise to about 37 million to 38 million ounces this year, from 34.8 million in 2008, and to grow about 2 to 3 percent in 2010.

Fresnillo's silver production rose 7.8 percent in the first half to a record 18.8 million ounces, while gold output fell 4.3 percent to 133,000 ounces, it said in July.

Gold output is seen growing about 70,000 ounces in 2010 with output from the Soledad and Dipolos project expected to start in the first quarter of next year. The group produced 263,640 ounces in 2008.

Fresnillo, which aims to double silver production and increase its gold output by 2018, said its two growth projects are progressing well.

Precious metals miner Harmony Gold Mining. , the world's fifth-biggest producer, reported a 13 percent fall in fourth-quarter headline earnings per share.